Federal Reserve: While bitcoins hold “promise,” we have no regulatory authority

Government agencies tell a US Senate committee what they think of Bitcoin.

On Monday afternoon, the United States Senate Committee on Homeland Security and Governmental Affairs will hear testimony from various government officials, academics, and Bitcoin proponents to discuss “virtual currencies.” As the committee meets, the current exchange rate of bitcoins to dollars is skyrocketing, breaking $600 per bitcoin. (In February 2013, it was around $30 per bitcoin.)

In their written testimonies released prior to the hearing, various government officials detailed their attitude and policies toward Bitcoin in particular. They noted that while such virtual currencies may be “legitimate,” they pose potential issues for law enforcement. Peter Kadzik, the Principal Deputy Assistant Attorney General, wrote in his letter to the committee that the FBI has “founded and chairs the Virtual Currency Emerging Threats Working Group.”

Notably, outgoing Federal Reserve Chairman Ben Bernanke wrote, “[T]here are also areas in which [such currencies] may hold long-term promise, particularly if the innovations promote a faster, more secure, and more efficient payment system.”

Bernanke said that while the Federal Reserve does monitor the evolution of Bitcoin and other related currencies, “it does not have authority to directly supervise or regulate these innovations or the entities that provide them to the market.”

The FBI continues to retain a large stash of bitcoins believed to have been seized from Ross Ulbricht, the main suspect in the Silk Road case.

Translation : We haven't figured out how to control/ruin bit coin just yet so we're biding our time until we do.

Actually, it's more like: it's interesting in a hobby kind-of-way, but because it doesn't matter to our real job, it's going to stay that way from our perspective. Also, with the way it's being used in reality, it's more of an SEC, FTC, or CFTC issue anyway.

Translation : We haven't figured out how to control/ruin bit coin just yet so we're biding our time until we do.

Its not going to be government that will "ruin" bitcoin. No, how it usually happens, as with many get rich quick schemes, is some investor is going to feel ripped off and run to the courts and write their congress critter their sob story who it turn would have to do something if they want to stay relevant.

Bitcoin is really the first generation of the virtual currency concept. I expect that eventually, after a few generations to work out the bugs, the fed will undoubtedly reimplement the USD as something similar, to take advantage of all the efficiencies a virtual currency provides. Of course, it would have to be designed to be more easily traceable, to have greater privacy, and to have a mechanism for the central bank to modify the money supply as needed. As Bitcoins exists today all transactions are essentially completely public, while tracing transactions to persons is possible but difficult. Also, the money supply in Bitcoin grows algorithmicaly until a certain point, after which it becomes fixed. That's obviously completely unfeasible for a real national currency. But the basic concept is the future of currency in general, and I am heartened that the Fed seems to recognize that this early on.

Bitcoin is really the first generation of the virtual currency concept. I expect that eventually, after a few generations to work out the bugs, the fed will undoubtedly reimplement the USD as something similar, to take advantage of all the efficiencies a virtual currency provides. Of course, it would have to be designed to be more easily traceable and to have greater privacy (i.e. the only people who can know about any transaction are the seller, the buyer, and the IRS. As Bitcoins exists today all transactions are essentially completely public, while tracing transactions to persons is possible but difficult). But the basic concept is the future of currency in general, and I am heartened that the Fed seems to recognize that this early on.

Bitcoin is the virtual version of going back to the gold standard and will fail on its own pace. This is way the Fed is not worried.

Bitcoin is really the first generation of the virtual currency concept. I expect that eventually, after a few generations to work out the bugs, the fed will undoubtedly reimplement the USD as something similar, to take advantage of all the efficiencies a virtual currency provides. Of course, it would have to be designed to be more easily traceable and to have greater privacy (i.e. the only people who can know about any transaction are the seller, the buyer, and the IRS. As Bitcoins exists today all transactions are essentially completely public, while tracing transactions to persons is possible but difficult). But the basic concept is the future of currency in general, and I am heartened that the Fed seems to recognize that this early on.

Bitcoin is the virtual version of going back to the gold standard and will fail on its own pace. This is way the Fed is not worried.

Yes, that is a fundamental design flaw. Or maybe not... as an ancillary currency it can afford to have an essentially random and volatile value because no national economy is dependent on it; it is just a hobby at this point. Its pseudo gold standard nature is certainly getting extremist libertarians on board to act as beta testers, so maybe it was a good choice from a QA perspective.

Bitcoin is really the first generation of the virtual currency concept. I expect that eventually, after a few generations to work out the bugs, the fed will undoubtedly reimplement the USD as something similar, to take advantage of all the efficiencies a virtual currency provides. Of course, it would have to be designed to be more easily traceable and to have greater privacy (i.e. the only people who can know about any transaction are the seller, the buyer, and the IRS. As Bitcoins exists today all transactions are essentially completely public, while tracing transactions to persons is possible but difficult). But the basic concept is the future of currency in general, and I am heartened that the Fed seems to recognize that this early on.

Bitcoin is the virtual version of going back to the gold standard and will fail on its own pace. This is way the Fed is not worried.

Yes, that is a fundamental design flaw. Or maybe not... as an ancillary currency it can afford to have an essentially random and volatile value because no national economy is dependent on it; it is just a hobby at this point. Its pseudo gold standard nature is certainly getting extremist libertarians on board to act as beta testers, so maybe it was a good choice from a QA perspective.

I think its this volatility that will eventually prompt the Fed or some other regulator to step in. Somebody or a bunch will eventually loose big and complain just as big.

I have the impression that the article is all about and centered on the last paragraph.

Well, just because the Federal Reserve says that they have no authority on bit coins, that does not means the FBI has not the authority to retain bitcoins or any other kind of evidence for that matter . Just in case

I would say, thinking that bitcoin is completely outside of the control of the US gov't is a little naive.

One would claim that the internet is completely outside of the control of the US gov't, being the internet, but the US gov't has proven time and time again that if they really WANT to mess with the internet, they can and will.

Its like saying "nah, nah, nah, na, boo, boo. You can't touch me!" at the US from your own little private island. Up until the US gets annoyed and lands a copter with a squad of recon marines on it and scoops you up.

It only gets worse if you are US citizen and/or conducting business on/in the US.

The US also isn't playing completely hands off. The FTC (was the FTC, right?) has already stepped in with Bitcoin exchanges and said that they need licensing. That is an element of regulation right there.

Translation : We haven't figured out how to control/ruin bit coin just yet so we're biding our time until we do.

Its not going to be government that will "ruin" bitcoin. No, how it usually happens, as with many get rich quick schemes, is some investor is going to feel ripped off and run to the courts and write their congress critter their sob story who it turn would have to do something if they want to stay relevant.

EDIT : Wow, need more coffee. I didn't even read my own post.

EDIT 2 : COFFEE!

Ok, now I remember where I was going. You say it won't be the government that will "ruin" bitcoin and then go on to mention government being the entity to "do something".

Yes, that is a fundamental design flaw. Or maybe not... as an ancillary currency it can afford to have an essentially random and volatile value because no national economy is dependent on it;

Not if you want to run businesses with it.

If I run a restaurant, I want to know that the value of what I collect won't collapse before I need to use it to buy my next round of groceries and make payroll in my local real world currency.

If businesses and individuals don't keep and hold bitcoins then it's just a transaction service like a credit card but without all of the trust people and businesses have in the existing infrastructure.

Bitcoin is really the first generation of the virtual currency concept. I expect that eventually, after a few generations to work out the bugs, the fed will undoubtedly reimplement the USD as something similar, to take advantage of all the efficiencies a virtual currency provides. Of course, it would have to be designed to be more easily traceable and to have greater privacy (i.e. the only people who can know about any transaction are the seller, the buyer, and the IRS. As Bitcoins exists today all transactions are essentially completely public, while tracing transactions to persons is possible but difficult). But the basic concept is the future of currency in general, and I am heartened that the Fed seems to recognize that this early on.

Bitcoin is the virtual version of going back to the gold standard and will fail on its own pace. This is way the Fed is not worried.

The gold standard did not fail, it just became politicaly advantagous to move to a fiat currency.

Many, many historical accounts of how various gold standards directly lead to inflation and debasement that possibly/probably could have been avoided with a fiat currency (various shogunates in Japan are a good example, many, many others though).

Things to know about money/currency in general:1) Money isn't real. It's a large scale collective delusion. Still, as long as everyone believes in it, it is useful.2) Money only has two purposes: As a store of value, and as a medium of exchange. To be good at these two goals, inflation/deflation needs to be fairly small and predictable.3) Commodity backed currencies, such as the gold standard, were fine for their time in lieu of the basic understanding of macroeconomics needed to manage a fiat currency properly. But we have progressed past the point where we must leave our national currency at the whims of such external factors as the supply and demand of a shiny, ductile metal with numerous industrial and aesthetic purposes.4) Deflation is disastrous for any fiat currency because it is exceedingly difficult to escape from during a depression. Whereas in a commodity-backed currency, wild jumps from inflation to deflation and back is basically standard operating procedure.

edit: Point 4 is somewhat controversial depending on what school of macroeconomics you subscribe to.

Bitcoin is really the first generation of the virtual currency concept. I expect that eventually, after a few generations to work out the bugs, the fed will undoubtedly reimplement the USD as something similar, to take advantage of all the efficiencies a virtual currency provides. Of course, it would have to be designed to be more easily traceable and to have greater privacy (i.e. the only people who can know about any transaction are the seller, the buyer, and the IRS. As Bitcoins exists today all transactions are essentially completely public, while tracing transactions to persons is possible but difficult). But the basic concept is the future of currency in general, and I am heartened that the Fed seems to recognize that this early on.

Bitcoin is the virtual version of going back to the gold standard and will fail on its own pace. This is way the Fed is not worried.

Yes, that is a fundamental design flaw. Or maybe not... as an ancillary currency it can afford to have an essentially random and volatile value because no national economy is dependent on it; it is just a hobby at this point. Its pseudo gold standard nature is certainly getting extremist libertarians on board to act as beta testers, so maybe it was a good choice from a QA perspective.

Bitcoin is nothing like the gold standard. Gold was fundamentally flawed because countries like Australia (where I live) have massive deposits of gold and anybody willing to sift thourgh sand in a remote creek bed can find large quantities of the stuff. There are other flaws with the gold standard that bitcoin does share, but many of the problems with gold do not apply to bitcoin.

Gold has an unpredictable supply which caused problems for banks especially when they needed to give out credit in an emergency or during world war 1/2. Bitcoin is dictaded by hard mathematics and we know *exactly* where it's going (in terms of how much is available) which makes it fundamentally different to the gold standard.

Bitcoin is really the first generation of the virtual currency concept. I expect that eventually, after a few generations to work out the bugs, the fed will undoubtedly reimplement the USD as something similar, to take advantage of all the efficiencies a virtual currency provides. Of course, it would have to be designed to be more easily traceable and to have greater privacy (i.e. the only people who can know about any transaction are the seller, the buyer, and the IRS. As Bitcoins exists today all transactions are essentially completely public, while tracing transactions to persons is possible but difficult). But the basic concept is the future of currency in general, and I am heartened that the Fed seems to recognize that this early on.

Bitcoin is the virtual version of going back to the gold standard and will fail on its own pace. This is way the Fed is not worried.

Yes, that is a fundamental design flaw. Or maybe not... as an ancillary currency it can afford to have an essentially random and volatile value because no national economy is dependent on it; it is just a hobby at this point. Its pseudo gold standard nature is certainly getting extremist libertarians on board to act as beta testers, so maybe it was a good choice from a QA perspective.

Bitcoin is nothing like the gold standard. Gold was fundamentally flawed because countries like Australia (where I live) have massive deposits of gold and anybody willing to sift thourgh sand in a remote creek bed can find large quantities of the stuff. There are other flaws with the gold standard that bitcoin does share, but many of the problems with gold do not apply to bitcoin.

Gold has an unpredictable supply which caused problems for banks especially when they needed to give out credit in an emergency or during world war 1/2. Bitcoin is dictaded by hard mathematics and we know *exactly* where it's going (in terms of how much is available) which makes it fundamentally different to the gold standard.

You are right. The flaw that they share that I had in mind was that no entity has overall control of the money supply of either bitcoins or a gold standard currency, and thus no corrective action can be taken in the face of changing macroeconomic conditions. Bitcoins isn't big enough for there to be much point to having a central bank, but any national virtual currency would require one.

This is at least the third notable bubble Bitcoin has experienced since I started following it in 2010. I have also used 4 different exchanges in 3 years, all of which are now gone, dormant, or won't deal with US dollars any more. I think Bitcoin is a great technology for rapid, hassle-free international payments, but the volatility means you have to be a speculator or pretty incredibly risk tolerant to make it part of an existing business.

Bitcoin is really the first generation of the virtual currency concept. I expect that eventually, after a few generations to work out the bugs, the fed will undoubtedly reimplement the USD as something similar, to take advantage of all the efficiencies a virtual currency provides. Of course, it would have to be designed to be more easily traceable and to have greater privacy (i.e. the only people who can know about any transaction are the seller, the buyer, and the IRS. As Bitcoins exists today all transactions are essentially completely public, while tracing transactions to persons is possible but difficult). But the basic concept is the future of currency in general, and I am heartened that the Fed seems to recognize that this early on.

Bitcoin is the virtual version of going back to the gold standard and will fail on its own pace. This is way the Fed is not worried.

Yes, that is a fundamental design flaw. Or maybe not... as an ancillary currency it can afford to have an essentially random and volatile value because no national economy is dependent on it; it is just a hobby at this point. Its pseudo gold standard nature is certainly getting extremist libertarians on board to act as beta testers, so maybe it was a good choice from a QA perspective.

Bitcoin is nothing like the gold standard. Gold was fundamentally flawed because countries like Australia (where I live) have massive deposits of gold and anybody willing to sift thourgh sand in a remote creek bed can find large quantities of the stuff. There are other flaws with the gold standard that bitcoin does share, but many of the problems with gold do not apply to bitcoin.

Gold has an unpredictable supply which caused problems for banks especially when they needed to give out credit in an emergency or during world war 1/2. Bitcoin is dictaded by hard mathematics and we know *exactly* where it's going (in terms of how much is available) which makes it fundamentally different to the gold standard.

You are right. The flaw that they share that I had in mind was that no entity has overall control of the money supply of either bitcoins or a gold standard currency, and thus no corrective action can be taken in the face of changing macroeconomic conditions. Bitcoins isn't big enough for there to be much point to having a central bank, but any national virtual currency would require one.

Executive Order 6102 was passed to steal gold from the citizens of America into Ft. Knox so that they could have leverage to inflate currency at will. It ensures that no child will have an inheritance that cannot be devalued over time. Self-sufficiency is the enemy of control; economic slavery in the name of profit and prosperity for the few.

Translation : We haven't figured out how to control/ruin bit coin just yet so we're biding our time until we do.

Its not going to be government that will "ruin" bitcoin. No, how it usually happens, as with many get rich quick schemes, is some investor is going to feel ripped off and run to the courts and write their congress critter their sob story who it turn would have to do something if they want to stay relevant.

EDIT : Wow, need more coffee. I didn't even read my own post.

EDIT 2 : COFFEE!

Ok, now I remember where I was going. You say it won't be the government that will "ruin" bitcoin and then go on to mention government being the entity to "do something".

It will be ruined by the whiners. Bitcoin will be ruined by the "nation of whiners". To keep government out, whiners need to stay out.

Well, the FED only has whatever power the US gov't gave them. Congress gave FED the power to print currency and manage it's supply/demand. Congress didn't give FED power to control other currencies. So, FED can't do anything about it. And, that's probably a bit annoying, b/c the FED as a central bank wants to control currency in the US. They fought hard doing that several times through-out US history. But as others have said, Bitcoin is really just a "novelty currency" to them. It's like going to an amusement park and they make you buy tickets to get beers. There's a bartering value to the bitcoins amongst a niche market, but not much else. (So far...)

If Bitcoin was really an issue, however, FED would get Congress to crack down on it really fast. If you think the FED works for Congress, then you've bought into the illusion.

Bitcoin is really the first generation of the virtual currency concept. I expect that eventually, after a few generations to work out the bugs, the fed will undoubtedly reimplement the USD as something similar, to take advantage of all the efficiencies a virtual currency provides. Of course, it would have to be designed to be more easily traceable and to have greater privacy (i.e. the only people who can know about any transaction are the seller, the buyer, and the IRS. As Bitcoins exists today all transactions are essentially completely public, while tracing transactions to persons is possible but difficult). But the basic concept is the future of currency in general, and I am heartened that the Fed seems to recognize that this early on.

Bitcoin is the virtual version of going back to the gold standard and will fail on its own pace. This is way the Fed is not worried.

The gold standard did not fail, it just became politicaly advantagous to move to a fiat currency.

It ceased to be economically useful, politics aside. The creation of Bitcoins, like digging up of gold, is economically unproductive and thus have no inherent value in the economy.

Fiat money on the other hand, is matched with the appropriate level of productivity (employment levels and so forth) in the economy (until Bernake's QE policies, IMHO) and so have inherent value and can therefore sustain itself into perpetuity.

Bitcoin is really the first generation of the virtual currency concept. I expect that eventually, after a few generations to work out the bugs, the fed will undoubtedly reimplement the USD as something similar, to take advantage of all the efficiencies a virtual currency provides. Of course, it would have to be designed to be more easily traceable and to have greater privacy (i.e. the only people who can know about any transaction are the seller, the buyer, and the IRS. As Bitcoins exists today all transactions are essentially completely public, while tracing transactions to persons is possible but difficult). But the basic concept is the future of currency in general, and I am heartened that the Fed seems to recognize that this early on.

Bitcoin is the virtual version of going back to the gold standard and will fail on its own pace. This is way the Fed is not worried.

Yes, that is a fundamental design flaw. Or maybe not... as an ancillary currency it can afford to have an essentially random and volatile value because no national economy is dependent on it; it is just a hobby at this point. Its pseudo gold standard nature is certainly getting extremist libertarians on board to act as beta testers, so maybe it was a good choice from a QA perspective.

Bitcoin is nothing like the gold standard. Gold was fundamentally flawed because countries like Australia (where I live) have massive deposits of gold and anybody willing to sift thourgh sand in a remote creek bed can find large quantities of the stuff. There are other flaws with the gold standard that bitcoin does share, but many of the problems with gold do not apply to bitcoin.

Gold has an unpredictable supply which caused problems for banks especially when they needed to give out credit in an emergency or during world war 1/2. Bitcoin is dictaded by hard mathematics and we know *exactly* where it's going (in terms of how much is available) which makes it fundamentally different to the gold standard.

It is exactly like gold in that more cannot be created when needed. The "mining" reference is spot on in more ways than one.

3) Commodity backed currencies, such as the gold standard, were fine for their time in lieu of the basic understanding of macroeconomics needed to manage a fiat currency properly. But we have progressed past the point where we must leave our national currency at the whims of such external factors as the supply and demand of a shiny, ductile metal with numerous industrial and aesthetic purposes.4) Deflation is disastrous for any fiat currency because it is exceedingly difficult to escape from during a depression. Whereas in a commodity-backed currency, wild jumps from inflation to deflation and back is basically standard operating procedure.

edit: Point 4 is somewhat controversial depending on what school of macroeconomics you subscribe to.

3- They where huge problems even in there time. The world was in constant monetary crisis for basically 40 years until the huge gold reserve discoveries in Alaska and South Africa in the 1890s and even this did not cure its ills.

4- Deflation is disastrous no matter what kind of currency you have. Its just there was no choice for most of the last 100 years of metal based currency then to deal with the swings. There are known tools on how to deal with deflation in a fiat system its just that they are under the control of politicians and not the central bank and they rarely seem willing to use them or use them to the degree needed.

And no one in power should ever listen to an Austrian. How a school that is only correct on accident, has no models what so ever and where every other school thinks they are insane has any influence is just sad.

The Fed isn't a part of the government. It's a privately owned bank, the shareholders, of which, are kept secret. They have exactly zero authority on monetary policy. They impose their control over the money supply by adjusting the interest rate on loans they give to other banks.

Many, many historical accounts of how various gold standards directly lead to inflation and debasement that possibly/probably could have been avoided with a fiat currency (various shogunates in Japan are a good example, many, many others though).

The arguement that gold standard leads to inflation is positvely wrong, in fact, the opposite has held true and can be easily verified. Overall from the late18th century untill the effective end of the gold standard in the 1930s the average year over year inflation measured at a fraction of a percent. In actuality much of the late 19th century there was strong debate over a gold standard, which would provided price stability, versus a silver standard, which would allowed inflation of the money supply. Simultaneously the USG did not retire the Greenback note after the Civil War and kept a couple hundred million on hand to so that they could inject the money in the economy to foster inflation.

At the same time there was an issue with volatility due to regional and national banks frequently having bank runs do to printing gold dollar notes in excess of their actual gold reserves. This, and the desire to have the government be able to inflate and deflate the money suplpy lead to the creation of the Federal Reserve; for good or ill depends on your economic worldview.

The argument that fiat allows a country to avoid debasement is spurious ast best given that monetary printing beyound demand either to spur economic growth, or collect sienorage, is just like debasement in the end result' decreasing purchasing power of nominal values.

The reason why the gold standard was eventually kibboshed in Amera was due to the fact that the US government was pumping out dollars but foreign governments were able to be repaid back in gold bullion. This resulted in a situation where the value of the gold per ounce exceeded the nominal dollar value and resulted in America hemorrhaging gold and helped contribute to the rampant inflation that the US experienced in the 1970s.

3) Commodity backed currencies, such as the gold standard, were fine for their time in lieu of the basic understanding of macroeconomics needed to manage a fiat currency properly. But we have progressed past the point where we must leave our national currency at the whims of such external factors as the supply and demand of a shiny, ductile metal with numerous industrial and aesthetic purposes.4) Deflation is disastrous for any fiat currency because it is exceedingly difficult to escape from during a depression. Whereas in a commodity-backed currency, wild jumps from inflation to deflation and back is basically standard operating procedure.

edit: Point 4 is somewhat controversial depending on what school of macroeconomics you subscribe to.

3- They where huge problems even in there time. The world was in constant monetary crisis for basically 40 years until the huge gold reserve discoveries in Alaska and South Africa in the 1890s and even this did not cure its ills.

4- Deflation is disastrous no matter what kind of currency you have. Its just there was no choice for most of the last 100 years of metal based currency then to deal with the swings. There are known tools on how to deal with deflation in a fiat system its just that they are under the control of politicians and not the central bank and they rarely seem willing to use them or use them to the degree needed.

And no one in power should ever listen to an Austrian. How a school that is only correct on accident, has no models what so ever and where every other school thinks they are insane has any influence is just sad.

Part of the reason why the US was in monetary crisis was the USG inability/unwillingness to retire the hundreds of millions of dollars in wartime greenback notes. This created a dual situation where one dollar, a gold back dollar, was better than another, a non-gold back dollar. This would result in situations where individuals or businesses would refuse to accept non-gold or silver backed dollars and this created economic imbalances.

If you think the FED works for Congress, then you've bought into the illusion.

Of course the Fed doesn't work directly for congress, it is intentionally designed to be independent from politics and functionally technocratic. The notion of Congress directly controlling the money supply is terrifying.

Bitcoin is really the first generation of the virtual currency concept.

Except it really isn't: actual currencies are, for the most part, virtual currencies already. Very few of the dollars (or Euros or whatever) in your bank account are backed by physical currency: your bank account is just a virtual number from which you can add/subtract from your own virtual number and add/subtract to someone else's virtual number. You do this by: making a credit card purchase; paying off said credit card balance; paying with a cheque; paying with a debit card; sending a money order to someone; taking out a loan; ... you get the idea. These are all transfers of virtual amounts, sometimes within the same bank, sometime across banks, but all of the same virtual amount of the same virtual currency.

You can, of course, also convert your virtual balance into paper notes (or plastic ones in some countries such as Australia and Canada), but *those* are basically virtual too: the value comes from a collective belief, backed up by a collective support of government institutions, that dollars are a suitable form of payment for all debts, public and private. Essentially, paper/plastic currency is largely just a store of nominal value from the virtual balance.

So, if everything we do with money is already virtual, and most of those transactions are already fairly secure, what big advantages does a system like Bitcoin bring that would make us want to use it as a basis for a currency? Never mind the disadvantages (which are numerous): I'm really curious to know what people see as the technical advantage is that can't be (or hasn't been) solved in the current banking system.

Bitcoin is really the first generation of the virtual currency concept.

Except it really isn't: actual currencies are, for the most part, virtual currencies already. Very few of the dollars (or Euros or whatever) in your bank account are backed by physical currency: your bank account is just a virtual number from which you can add/subtract from your own virtual number and add/subtract to someone else's virtual number. You do this by: making a credit card purchase; paying off said credit card balance; paying with a cheque; paying with a debit card; sending a money order to someone; taking out a loan; ... you get the idea. These are all transfers of virtual amounts, sometimes within the same bank, sometime across banks, but all of the same virtual amount of the same virtual currency.

You can, of course, also convert your virtual balance into paper notes (or plastic ones in some countries such as Australia and Canada), but *those* are basically virtual too: the value comes from a collective belief, backed up by a collective support of government institutions, that dollars are a suitable form of payment for all debts, public and private. Essentially, paper/plastic currency is largely just a store of nominal value from the virtual balance.

So, if everything we do with money is already virtual, and most of those transactions are already fairly secure, what big advantages does a system like Bitcoin bring that would make us want to use it as a basis for a currency? Never mind the disadvantages (which are numerous): I'm really curious to know what people see as the technical advantage is that can't be (or hasn't been) solved in the current banking system.

You are right, except that you are being overly broad with the term "virtual". The virtual part comes from the fact that secure transactions are built into the actual currency protocol. The way it is right now every bank independently manages balances for people with accounts. There are systems in place to allow banks to transfer funds among themselves, but for the most part the system is fairly ad-hoc and organic. This results in large amounts of overhead that could be eliminated if everything was built in. The idea is to deprecate the entire concept of retail banks and credit cards companies, replacing them with hyper-efficient clearing houses where the needs of creditors and debtors can be brought together. It basically boils down to reducing transaction costs to virtually zero.